Ask Emily: We both own a home, but want to move in together…

Tldr - Today’s column is from a 32 year old female who makes $150k and owns a home. They’d like to move in with their partner (33 year old male) who also owns his own home and are looking for guidance on how to think about the financial piece of moving in. Are there capital gains concerns? Which house makes more sense?

Dear Emily

Hi All,

My significant other and I are planning on moving in together but are having trouble figuring out what makes the most financial sense.

I (32F) make $150,000+ per year, no debt other than my mortgage. Purchased my house in 3/2023 for $410,000. Estimated value now is $450,000 with the improvements I have made since moving in. I have a mortgage with $380,000 remaining with a 6.6 interest rate. I am going to have to refinance or sell before January 2025 due to stipulations from a divorce settlement. Unfortunately if I sell prior to 3/2025, it’s my understanding I’ll get f***ed with capital gains tax. We like my actual physical house but the location isn’t ideal.

He (33M) makes 75k, has 10k student debt and his own mortgage. His house was purchased in June 2023 for $260,000 and he has about 180,000 remaining on his mortgage with a 5.9 interest rate. His house needs quite a bit of work (some plumbing, electrical issues, basement needs to be sealed, etc) but is in a great location and obviously much cheaper than my house.

Trying to figure out what makes the most sense. He has talked about trying to rent out his house and moving in with me, and later on purchasing a house together. I have also considered just selling my house instead of refinancing and moving in with him because it’s significantly cheaper, but I also hesitate to do that as well. It seems like a good time to sell in our local market but I dont know if that makes sense given the capital gains tax.

Help?

From Emily

First things first, if you’re living in the house and it’s your primary residence (IRS talk for - you actually live here and don’t live somewhere else / rent another place to live), then you don’t need to pay capital gains on up to $250k of your gain. 

Since you bought the house for $410k and it went up to $450k, your $40k of gain fits neatly within that exemption. To qualify, you must have lived in your house for at least 24 months of the past five years. You can also only claim this tax benefit once every 2 years (ie. you can’t be flipping houses in < 2 years).

Since you bought that house in 2023, let’s do some math:

1. Sell the house now: since you’ve owned it for 1+ years, at a $150k income, you’d be in the 15% capital gains tax rate. That means you’d pay ~$6k in cap gains taxes (and there will be other fees for selling too. 

2. Keep the house: if you own the house until next March, you could qualify for the cap gain exemption so you don’t have to pay taxes. That means you’ll need to refinance

The cost of refinancing will depend on your credit score and the interest rate at the time; we were supposed to see rates come down but stubborn inflation has kept interest rates higher for longer than expected. If rates drop by early next year, you may see a slightly lower / similar rate. 

Now to think through options with your partner, there are a few additional questions:

• Whose house is easier to rent out? What does potential rent look like compared to the costs? 

  • Are people willing to pay enough rent that it can cover a mortgage? Note: if you rent it out, you will not be eligible for the capital gains tax exemption anymore.

• Whose house is in a 'hotter' neighborhood? ie. more people are looking to rent or buy?

  • The ‘hotter’ neighborhood may see the house value increase faster.

• Do you have an estimate for the cost of the ‘work’ needed on his house?

  • And will you be able to sell it even w/ the work? Is it still livable even with the work?

Note (sorry, I’m a CPA,CFA and need to put this here): this is an opinion and is not intended to be (and may not be relied on in any manner as) legal, tax, investment, accounting or other advice or as an offer to sell or a solicitation of an offer to buy any securities of any investment product or any investment advisory service.

Some additional resources for you to read: https://www.investopedia.com/ask/answers/06/capitalgainhomesale.asp

https://www.bankrate.com/real-estate/capital-gains-tax-on-real-estate/

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